Rising Bond Yields Threaten US and French Financial Stability
Rising government bond yields in the United States and France are creating systemic instability amid record market leverage and weakening foreign demand for debt.
Rising long-term government bond yields in the United States and France are creating systemic financial instability. In the United States, 10-year Treasury yields have climbed above 5.25%, complicating the government's need to borrow $2 trillion annually. This pressure is compounded by weakening foreign demand, with central banks in China and Japan reducing Treasury holdings by $120 billion and the Government Pension Fund of Norway planning an $80 billion reduction.
The Federal Reserve System continues an interest rate hiking cycle and balance sheet reduction, which analysts warn could trigger margin calls and corporate defaults. The US financial system is currently strained by $1.5 trillion in stock market margin debt and over $1 trillion in unrealized losses on sovereign bond holdings held by banks and insurance companies.
France faces a parallel crisis with $4 trillion in public debt and an unresolved budget deficit. President Emmanuel Macron has appointed several prime ministers in attempts to stabilize national finances. The European Central Bank may provide a bailout for France, provided the country implements a credible macro adjustment program. Experts suggest these combined conditions could lead to a broader economic recession if the Federal Reserve does not pivot its current policy.
